Financial Markets and Investment Banking

Day 1: Regulation, Financial Arithmetic, Market Conventions

Introduction:

Ø Overview over Financial Markets

Ø Cash Flows: the Underlying of any Financial Instrument

Ø Risk and Return Characteristics

Ø Current developments

Financial Markets:

Ø Money Markets

Ø Capital Markets

Banking Regulations:

Ø Capital Adequacy Requirement

Ø Basel I

Ø Basel II

Time Value of Money and Interest Rates (I):

Ø Factors determining the Value of Money

Ø Future Value and Present Value

Ø Discount Factors and Compound Factors

Ø Yield versus Return

Ø Differences between Capital Markets and Money Markets

Ø Exercises

Explanation of the commonly used Market Conventions:

Ø US Bond Basis

Ø US Money Market Basis

Ø UK Money Market Basis

Ø ISMA Convention

Ø Actual/Actual

Payment Day Convention

Ø Preceding and Following Payment Day Convention

Ø Modified Following Payment Day Convention

Ø FRN Convention

Day 2: Money Markets and Foreign Exchange

Money Market Instruments:

Ø Discounted Securities versus Interest-bearing Securities

Ø Interest Rate Calculations

Forward Markets:

Ø Developing a Forward Market from Deposits

Ø Forward Rate Agreements (FRA’s)

Ø Interest Rate Futures

Foreign Exchange Markets:

Ø Spot FX

Ø Forward Outright

Ø FX Swaps

Ø Covered Interest Arbitrage

The Repo Markets:

Ø Sell/Buy Back

Ø Classic Repo

Ø Securities Lending

Day 3: Bonds and Interest Rate Risk Management

Funding through Capital Markets:

Ø Equity Finance

Ø Loan Financing

Ø Securitisation

Ø Syndication

Ø Bond Financing

Ø Hybrid Instruments

Introduction to Bond Markets:

Ø Main Players

Ø The Investor Perspective

Ø The Borrower Perspective

Ø The Intermediaries Perspective

Ø Credit Structure, Credit Agencies and Ratings

Bond Market Segments:

Ø Domestic Bond Market

Ø Foreign Bond Market

Ø International Bond Market

Ø Global Bond Markets

Bond Pricing:

Ø Pricing and Valuation of Fixed-Rate Bonds

Ø Accrued Interest

Ø Fed versus Street Method

Ø The Relationship between Price, Yield and Coupon

Bond Risk Management:

Ø Factors affecting the Bond Price

Ø Bond Price Sensitivity

Ø Macauley Duration

Ø Modified Duration

Ø DV01

Ø Convexity

Applications of Duration:

Ø Risk Measure

Ø Investment Decisions

Ø Portfolio Management and Switching

Ø Asset and Liability Management

Ø Hedging

The Debt Origination Process:

Ø Role of Banks as Intermediaries between Borrowers and Investors

Ø The Interplay between Origination, Sales and Trading

Ø Syndication of New Issues

Case Study: Debt Origination

Ø Road Show

Ø Book Building

Ø Benchmarking the new Bond

Ø Selecting the Re-offer Spread

Ø Selecting the Coupon

Ø The Re-offer Price

Ø Including the Fees for Investors and Issuers

Ø Issue Price versus All-in Price

Ø Amortising the Fees

Ø Benchmarking after Fees

Day 4: Term-structure of Interest Rates and Swaps

Coupon Stripping:

Ø TIGR, LION’s, CATS, DOGS, TR, STRIPS

Ø Special purpose vehicles (SPV), CLN’s, CMO’s etc

Term-structure of Interest Rates:

Ø Par Curve

Ø Zero-coupon Curve

Ø Forward Curve

Ø Bootstrapping

Benchmarking and Credit:

Ø Money Market and Capital Market Benchmarks

Ø Government Curve

Ø Bank Curve

Ø Corporate Curve

Interest Rate and Currency Swaps:

Ø The Swaps Mechanism

Ø Types of Swaps

Applications of Swaps:

Ø Speculation

Ø Hedging

Ø Asset and Liability Management

Ø Market Making

Ø Risk Management

Ø Debt Origination Arbitrage

Ø Asset Swaps

Ø Creating Synthetic Instruments

The Principle of Swap Pricing:

Ø The Need for Forward Rates

Ø The Need for Zero-coupon Rates

Swap Pricing:

Ø Finding the Forward Amounts

Ø Discounting the Floating Leg

Ø Equalise the Floating Leg with the Fixed Leg

Ø Discounting the Fixed Leg

Ø Finding the Swap Rate

Ø Creating a Swap Curve

Swap Valuation:

Ø Swap Rates

Ø Zero-coupon Rates

Ø Forward Rates

Ø Discount Factors

Ø PV of fixed and floating Leg

Ø Net Present Value

Day 5: Swap Pricing and Futures

Asset Swap Pricing:

Ø Par-Par Structures

Ø Premium-Par Structures

Ø Discount-Par Structures

Uses of Asset Swap Valuation:

Ø Investment Decisions

Ø Benchmarking over Swap Curve

Ø Benchmarking over Libor

Pricing Structured Products:

Ø FRN’s

Ø Zero-coupon Bonds and Swaps

Ø Step-up Coupon Bonds and Swaps

Ø Amortising Bonds and Swaps

Ø Roller-coaster Bonds and Swaps

Ø Forward Starting Bonds and Swaps

Introduction to Futures and Options:

Ø The History and Development of the Market

Ø Definitions

Ø Over-the Counter (OTC) versus Exchange Traded Products

Ø The Role of The Clearing House

Margining:

Ø Trading

Ø Novation of Contract

Ø Initial Margin

Ø Variation Margin

Ø Intra-day Margin Call

Ø Gearing

Pricing and Valuing Futures:

Ø Basic Futures Mechanism

Ø Pricing Futures through Cash and Carry Arbitrage

Ø The Value Basis

Ø The Carry Basis

Ø The Importance of Credit

Specialities with Futures Contracts:

Ø Cash Settlement

Ø Physical Delivery

Bond Futures:

Ø Exchange Delivery Settlement Price

Ø Price Conversion Factors

Ø Cheapest-to-deliver

Day 6: Options and Structured Products

Introduction to Options:

Ø Definitions

Ø Calls and Puts

Using Options to:

Ø Gear up

Ø Speculate

Ø Hedge

Ø Arbitrage

Option Trading Strategies:

Ø Straddles

Ø Strangles

Ø Bear Spreads

Ø Bull Spreads

Ø Butterflies

Ø Risk Reversal

Ø Cylinders

Ø Put - Call Parity

A Simple Approach to Option Pricing:

Ø Volatility

Ø The Binomial Model

Ø The Black & Scholes Model

Ø The Greeks (Risk measures)

Case Study: Managing the Risks

Ø Delta-hedging your Option Positions

Exotic Options:

Ø Barrier Options

Ø Knock-in and Knock out Options

Ø Lookback Options

Ø Best of two (Digital)

Structured Products:

Ø Participation and Tracking

Ø Guaranteed Return Products

Ø Yield enhancement

Interest Rate Risk Management:

Ø Arbitrage boundaries

Course Summary:

Ø Putting Financial Instruments Into Context

Risk Management